The sixth episode of the Buy to Let Show looks at how to exit buy to let. Plus, property expert Kate Faulkner provides a guide on what landlords need to consider when selling a rental property.

When you're selling a buy-to-let property, you're not just a property owner, but a landlord too. As such, there's more for you to consider than if you were simply selling your own home.

The first thing to decide is whether it would be better to sell another investor with the sitting tenants, or to evict your current tenants and sell on the open market. Depending on what you do and the response of your tenants, the timescales could be difficult to predict and it may mean marketing a tenanted property may not be straightforward.

Once you have secured a buyer, the legal conveyancing process may be more complicated if you're selling with tenants in situ. Finally, you have to understand what capital gains tax you might be liable for, which might affect the timing of your sale.

People invest in property for a variety of reasons, so an effective exit strategy for one landlord may not suit another. Here are the three key steps to help you exit your own investment successfully:

From the start have a clear plan and take specialist legal and tax advice so that the investment is set up right for your goals.

Every one or two years review your investment to make sure it's on track to deliver what you expect, making adjustments as necessary.

As you approach the time you'd like to sell, take professional advice about your own financial situation and property market.

One of the most important things to consider when you're looking at selling your buy to let is whether to sell with tenants or with vacant possession and that's fundamentally a financial decision.

It's certainly possible to agree a sale with tenants on notice. However, buyers can be hesitant to do that because of the potential issue that the tenants might refuse to leave. This could cause a significant delay before completion is possible.

Selling without tenants living in the property can help you get the highest possible price on the open market. For instance, if you have tenants who don't tidy up and/or have poor furnishings, it won't show the property off in its best light. However, without tenants living in it, the downsides while you're selling will include no rental income to cover mortgage payments or other bills associated with the property, such as heating, water and Council Tax and cover on the property could be restricted by your insurers as it is unoccupied.

The other consideration is the state of the property. If it's been tenanted for a number of years, depending on how well it's been maintained, you may need to spend some money on refreshing the fittings and décor to secure a sale at the best price. That's more money coming out of your pocket with no guarantee that you'll make it back.

Speak to local estate and letting agents to establish the strength of the sales market and the current demand for your type of property. Good letting agents will be aware if any of their landlords are looking to expand their portfolios and you may be able to secure some early interest.

Selling to another landlord might mean a lower sale price, but you'll avoid the hassle of evicting your tenants and have the peace of mind of knowing that you'll continue to receive rental income right up to the day you complete. So you need to weigh up the financial benefits of each option and then put a value on the potential time and emotional demands on you.

Once you've made the decision on how to sell, you should consult with your tax advisor to establish when it would be most financially beneficial for you to exit your investment and how you can mitigate the amount of tax you pay. For example, if you sold some shares this year and had used up all of your capital gains tax (CGT) allowance, it might be better to wait 12 months so you could use the following year's CGT allowance to go towards the sale.

This is often viewed as an ideal solution for landlords looking to exit their investment. Selling to another landlord means benefitting from rental income right up until the day the sale completes. It can also mean for the tenants that the only thing that changes is their landlord.

The only potential downside is that you may not get the best price for your property, as investors are always looking to secure properties at below their 'true' market value. However, because there's no loss of rental income for you as the seller and no need to deal with evicting tenants, many landlords feel compensated for a slight reduction in the sale price.

If the property is furnished, you may want to charge your buyer an amount for all the fittings and furnishings. If it's specified in the sale as a separate charge, you may have to pay for an official valuation, in case there are any queries from HM Revenue and Customs in relation to the amount of stamp duty payable by the buyer.

There will also be a little more paperwork involved in the legal conveyancing process. In addition to completing the standard property information and fixtures forms, your buyer will require copies of:

the tenancy agreement/s

the relevant gas safety and electrical certificates required to let the property legally

the check-in inventory

any licensing or planning permission relating to the property being let

an inventory (if furnished) detailing exactly what items in the property belong to you and are therefore included in the sale

If the buyer is taking out a mortgage, they may also need proof - either within the tenancy agreement or by other signed confirmation - that the tenants are aware the property is subject to a mortgage. This is because the tenants will need to understand the grounds on which the bank may be entitled to possession if the property goes into arrears.

You'll also be required to give details about the tenants. This can include when and how they pay rent and whether there have been any problems with arrears or conduct. In some instances, you may also need to confirm via your solicitor that you will transfer, on completion, any deposit monies held.

As far as the tenants, the tenancy agreement they signed remains valid whether or not the landlord has changed. For example, that means if the tenants are still within the first 12 months of the agreement, the new landlord cannot simply put the rent up.

Selling a multi-let will involve all the above with some more things on top. Any property that is considered a House in Multiple Occupation (HMO) requires licensing and planning permission in increasing numbers of local authority areas.

The issue for you, as a seller, is that while these regulations can't be retrospectively applied by the council, if your buyer requires a specialist HMO mortgage, which they likely will, their lender will usually require proof that the property complies with the latest regulations. Even if you've been operating the property as an HMO for many years, it may be worth obtaining any necessary license or planning permission before marketing the property. It could smooth the sale path for you further down the line.

Plus, your buyer's solicitor will need evidence that the property complies with the required health and safety regulations for the size of HMO.

Overall, the more documented evidence you can provide to satisfy your buyer's solicitor and mortgage lender that the property is fully legally compliant and being operated at the highest buy-to-let standards, the smoother the sale should be.

It's important to know that you cannot demand that a tenant leaves, simply because you want to sell. Their agreement stands, so if they signed for 12 months without a 6-month break clause and they're only in the third month of that agreement, they can legally remain in the property for another 9 months.

If you give them sufficient notice and/or come to an agreement whereby, for example, you offer them some financial compensation for leaving early, they could agree to end their tenancy sooner. However, if they dig their heels in, there is nothing you can do about it.

This is just one reason why it's sensible to plan your exit well in advance, so that you can make sure you don't sign any new tenancies that might interfere with your timetable for selling.

To give your tenants notice to leave, assuming they haven't breached their lease in any way, you simply need to serve them with a Section 21 Notice two months before the end of their fixed-term tenancy agreement. This will inform them you wish to take the property back.

If they're currently on a periodical agreement, then the Section 21 can be served at any time, giving them two months' notice, provided the vacation date falls at the end of their rental period. So if they pay rent monthly, you should serve the Section 21 on the first day of a month, which will require them to leave on the last day of the following month.

However, it's worth considering going through a specialist legal company that can handle this for you to make sure all the paperwork is done correctly from the start.

If your tenants don't leave by the specified date, you'll have to apply to the court for a possession order, which can be accelerated if the tenants don't owe any rent. If they still refuse to leave, you'll have to apply for a warrant for possession, which means a bailiff will remove them from the property. In the worst-case scenario, if your tenants do dig their heels in, it could take anything up to five months to get them out of your property.*
(*source: Paul Shamplina https://www.property118.com/how-long-does-it-take-for-a-tenant-eviction/42533/)

Assuming your tenant is happy to accept your notice to leave, you or your agent should return their deposit to them within 10 days. If it has been lodged with a custodial scheme, it will be released back to the tenant within 10 days of both parties completing the scheme's repayment process.

But it's worth noting, for an eviction notice relating to a tenancy that began after April 2007 to be valid, any deposit taken must be protected within one of the government-approved deposit protection schemes. If it hasn't been protected and the tenant wasn't supplied with the required prescribed information relating to the scheme, you may be fined and required to begin the whole eviction process again.

One of the biggest things to understand before you exit your investment is how much CGT you'll need to pay. Some landlords make the mistake of thinking that capital gains tax is payable on the amount of equity they are left with after selling their investment property. However, it's actually payable on the difference between the purchase price and the sale price.

Here's an example, assuming you're a higher-rate taxpayer:

Property purchase price:

£150,000

Property sale price:

£300,000

Gain:

£150,000

Tax year 2017-18

Personal allowance:

-£11,300

Taxable gain:

£138,700

CGT bill (at 28%):

£38,836

Potentially during the time you have owned the property, you could have remortgaged and released equity either to reinvest or spend. Here, you'd need to check how much tax you may have to pay versus how much capital you will be left with after the sale.

If you had released equity from the above fairly recently:

Last valuation:

£290,000

(Valuation at time of remortgaging)

Remortgage at 75% Loan-to-Value

Mortgage loan amount:

£217,500

Equity:

£82,500

Selling agent's fee at 1.5%:

£4,500

Legal sale costs:

£1,000

Equity after costs:

£77,000

In this example, your CGT bill of £38,836 would equate to 50% of the money you were left with after the sale. If a landlord mistakenly assumed CGT was payable on the equity at the time of the sale, they might only set aside around £20,000 and would have a real shock when the actual tax bill came in at almost double that.

The other thing it's worth checking with your tax advisor whether you would be better off selling in the current tax year or waiting until the next one. This is particularly the case if you own property via a company or are selling more than one. If you can spread individual property sales across different tax years, it means you benefit from your full personal allowance on each one, which reduces your CGT bill for the year by several thousand pounds.

If you're a basic-rate taxpayer, you need to be aware that the amount of the capital gain, when added to your other taxable income (such as salary or returns from other investments), could take your earnings for the year in to the higher-rate threshold. This could have an impact on any benefits you receive or tax breaks you are currently benefitting from.

As with all financial investments, you should take specialist advice, tailored to your own personal circumstances, to help you maximise your profits and minimise your tax liabilities.